2019 Banking and Capital Markets Outlook - Reimagining transformation

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2019 Banking and
Capital Markets Outlook
Reimagining transformation
2019 Banking and Capital Markets Outlook: Reimagining transformation

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Brochure / report title goes here |
                                   Section title goes here

Table of contents

Calmer waters: A decade after the financial crisis, the
banking industry is on firmer ground								                       1

Regulation: A new era of global regulatory divergence						        5

Technology: Creating a symphonic enterprise							                 8

Risk: Strengthening the core with new-age defenses						           11

Retail banking: The digital leadership race 								               13

Corporate banking: Digitization and a new credit discipline					   16

Transaction banking: Modernizing operations with a focus 					     18
on improving the client experience

Investment banking: New client engagement models 						            19
and ecosystem orchestration

Payments: The imperative to diversify growth, 							              22
bolster security, and restructure the organization

Wealth management: Balancing business growth 							               24
with product rationalization and transparency

Market infrastructure: Harnessing the power of data 						         26
and technologies to drive a competitive growth agenda

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2019 Banking and Capital Markets Outlook: Reimagining transformation

Calmer waters
A decade after the financial crisis, the
banking industry is on firmer ground

The global banking system is not only bigger and more                              Total assets in the United States reached a peak of
profitable but also more resilient than at any time in                             $17.5 trillion.2 Capital levels are up as well, with average tier 1
the last 10 years (figure 1). According to The Banker’s                            capital ratio standing at 13.14 percent. Return on equity
Top 1000 World Banks Ranking for 2018, total assets                                (ROE) for the industry is at a post-crisis high of 11.83 percent.3
reached$124 trillion, while return on assets (ROA) stood at                        Efficiency ratios also are at their best. Similarly, on other
0.9 percent. Similarly, tier 1 capital ratio as a proportion of                    metrics, such as nonperforming loans and number of
assets rose to 6.7 percent, significantly higher than in 2008.1                    failed institutions, the US banking industry is robust.

But the recovery since the financial crisis has not been                           However, the same cannot be said of the banking industry
uniform across regions. US banks, compared to their                                in Europe. Structural deficiencies, overcapacity, low/negative
European counterparts, are ahead on multiple measures.                             interest rates, and the absence of a pan-European banking
Aggressive policy interventions and forceful regulations                           regulatory agency have all likely contributed to European
helped propel US banks to health more quickly. And                                 banks experiencing persistent profitability challenges.
more recently, favorable GDP growth, tax cuts, and rising
rates have further bolstered the state of the industry.

Figure 1. Growth of the global banking industry

In the last decade, the top 1,000 world banks have grown

           Bigger                     More profitable                 Better capitalized

         Assets ($T)                 Return on assets (%)           Tier 1 capital/assets (%)

                                                 .9%                              6.7%
               $123.7
       $96.4                                                              4.4%

                                         .1%

       2008     2017                    2008     2017                    2008     2017

Sources: Danielle Myles, “Top 1000 World Banks 2018,” The Banker, July 2, 2018; Danielle Myles,
“Top 1000 World Banks 2017,” The Banker, July 3, 2017; Charles Piggott, “Top 1000 World Banks
2009,” The Banker, June 24, 2009.

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2019 Banking and Capital Markets Outlook: Reimagining transformation

Many European banks have become smaller, retrenching                                 reported a 15.3 percent ROE in 2017.7 However, the concern
from international markets and exiting former profitable                             with economic growth and the tariff war with the United
businesses. Consider the fact that profits of the top five                           States are already affecting prospects.8 Meanwhile, Japanese
European banks dropped from $60 billion in 2007 to                                   banks, which escaped the financial crisis, have long suffered
$17.5 billion in 2017.4 However, European banks are showing                          the effects of slow domestic growth and low/negative
some improvement. ROE for Western European banks                                     interest rates.9
in the top 1,000 world banks grew to 8.6 percent in 2017,
compared with 5.5 percent in 2016.5                                                  Despite this overall optimistic picture for the global banking
                                                                                     industry, uncertainties loom on the horizon. Real GDP
In the Asia Pacific (APAC) region, the growth of Chinese                             growth forecasts from the International Monetary Fund
banks has been the most stunning development in the last                             (IMF) point to a deceleration in all regions, including China
10 years. The Chinese banking industry has surpassed that                            and Emerging Asia (figure 2). In the latest forecast, Deloitte
of the European Union (EU) in terms of size. The world’s four                        economists are predicting a 25 percent probability of a
largest banks in 2018 are Chinese; in 2007, none of the top                          recession in the United States in 2019. In this scenario,
10 banks in the world were Chinese.6 Chinese banks are                               tariffs and dilution of the stimulus effect could weaken US
also doing well in terms of profitability—the larger banks                           economic growth in late 2019 or early 2020.10

Figure 2. Real GDP growth by region, 2013–2023

In the last decade, the top 1,000 world banks have grown

 9%
                                                                                                               Forecast
 8%
 7%
 6%
 5%
 4%
 3%
 2%
 1%
 0%
-1%
-2%
      2012      2013      2014      2015      2016         2017       2018    2019       2020      2021     2022      2023

      European Union             Emerging Europe              Emerging Asia                LatAm

      MENA                       China                        Japan                        USA

Source: World Economic Outlook, October 2018, International Monetary Fund.

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2019 Banking and Capital Markets Outlook: Reimagining transformation

And on the regulatory front, global divergence shows no                Last year, we urged banks and capital markets
signs of abating as governments continue to buck previous              institutions to accelerate their transformation,
post-crisis trends of synchronization. To spur economic                particularly digital transformation. No doubt many
growth, local jurisdictions are increasingly implementing              banks have embraced digital transformation across
their own standards, sometimes in patchwork.                           the banking and capital markets value chain.

While net new regulations in the United States appear                  But how much of this change is purposeful and
unlikely, the reprieve has largely been confined to smaller            strategic? Change for change’s sake typically only begets
and midsize banks. Large banks, despite potential                      disappointment. Banks should bolster their conviction and
relief from the Volcker Rule, are expected to continue                 reimagine transformation as a holistic, multiyear process
to operate under the same regulatory agenda.                           and “change how they change.” The world is becoming too
                                                                       volatile, and external change is happening more rapidly
In the technology arena, the promise of exponential                    than before. Taking a traditional approach in confronting
technologies seems more real than ever. While the wild                 these challenges may not work. “Change the bank”
enthusiasm with blockchain has tapered off, the industry               initiatives should move to the fore and could essentially
continues to sail toward a blockchain future. However,                 become the new operating model for “running the bank.”
the energy might now lie with artificial intelligence
(AI) and cloud, as they are already transforming                       This transformation should fundamentally start with
many aspects of banking in significant ways.                           banks reaffirming their role in the global financial system.
                                                                       What do they want to be in the next five or 10 years?
But for any of these technologies to have maximal
impact, data is key. Although data is plentiful, it is often           Banks should discard grand visions of becoming
not easily accessible, clean enough, nor integrated.                   “a technology company” and instead focus on customers,
                                                                       enhance trust as financial intermediaries, facilitate capital
Meanwhile, the relationships between banks, fintechs, and              flows, and provide credit to the global economy with data
bigtechs are evolving rapidly. Fintechs are increasingly no            as the bond that sustains the amalgam of technologies—AI,
longer seen as scrappy adversaries—collaboration with                  automation, cloud, core modernization, etc.—best suited
incumbents is more the norm. With increasing industry                  for the purpose.
convergence, the relationship between the banking
industry and bigtech can be characterized as a bit guarded.
Banks typically need bigtech, and in some ways bigtechs
also need banks, as the banking industry remains a big
revenue source for many technology companies.

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2019 Banking and Capital Markets Outlook: Reimagining transformation

Figure 3. Reimagining transformation in banking and capital markets

                                                 Regulations
                                                   and tax

                                  Market                              Retail
                               infrastructre                         banking

                                                      e r    c e n
                                                 m                   t
                                                                         r
                                            o
                                                                             i
                                      t

                                                                             c
                                     s

                                                                             i t
                                   C u

                    Wealth                                                              Corporate
 Technology                                                                                         Risk and
                                                                                 y

                  management                 Reimagining                                 banking
  and data                                 transformation                                           privacy
                                                                                 C u
                                       y
                                   i t

                                                                             s
                                      c

                                                                             t
                                         i

                                                                         o
                                             r                       m
                                                 t            e r
                                                     c e n

                          Payments                                                Transaction
                                                                                    banking

                                                     Investment
                                                       banking

                                                      Talent

Source: Deloitte Center for Financial Services analysis.

Future-proofing the business                                                                          We urge banks not to become complacent. The economic/
Our main message, though, is the following: There may                                                 credit cycle is bound to turn at some point. Use recent
be no better time than now to reimagine transformation.                                               fortunes to invest wisely, and pursue change with clarity
Economic fundamentals are stronger than at any                                                        and conviction.
time in the last decade. The regulatory climate is not
going to get any more challenging. And, technologies                                                  In this report—the 2019 Banking and Capital Markets
to enable transformation are not only getting more                                                    Outlook—we discuss the need for strategic transformation
powerful but also more readily accessible, easily                                                     in the following areas in 2019: regulatory compliance,
implementable, and economical than before.                                                            tax, technology, risk, privacy, and talent. We then
                                                                                                      lay out our expectations in seven primary business
Indeed, there appears to be a new kind of                                                             segments: retail banking, corporate banking, transaction
promise in the banking industry.                                                                      banking, investment banking, payments, wealth
                                                                                                      management, and market infrastructure (figure 3).
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2019 Banking and Capital Markets Outlook: Reimagining transformation

Regulation
A new era of global regulatory divergence

Last year, we predicted a stabilization on the regulatory              The Department of Labor’s (DOL’s) fiduciary rule, requiring
front after years of intense scrutiny by regulators                    financial institutions to act in the best interest of their
around the globe. Much has happened since then.                        clients, was overturned, but a new best-interest rule from
Growing divergence in global regulatory standards                      the SEC is still a possibility. Meanwhile, enforcement actions
remains a fact. As countries look for ways to spur                     by the Consumer Financial Protection Bureau (CFPB) have
economic growth, many are increasingly showing a                       declined. As of September 2018, the CFPB had announced
willingness to take a fragmented approach, bucking                     only five enforcement actions since February 2017.13
the previous trend of post-crisis synchronization.
                                                                       While the pace of new regulations has decelerated under the
In the United States, the focus on refining or even                    current US administration, the role of the states may grow in
replacing existing regulations remains. A new bill, the                prominence. As an example, California passed the Consumer
Economic Growth, Regulatory Relief, and Consumer                       Privacy Act of 2018, which establishes new data protection
Protection Act, amending certain provisions in the                     rights for consumers. Other states are likely to follow suit.
Dodd-Frank Act was signed into law. Notably, the
statutory systemically important financial institutions                In Europe, the General Data Protection Regulation (GDPR),
(SIFIs) asset thresholds for enhanced prudential                       the first of its kind to provide sweeping data protections
regulations, such as stress tests and capital and liquidity            to EU citizens, will continue to reshape privacy and
ratios, were increased, giving the most relief to banks                data ownership policies. Meanwhile, even though the
with assets between $50 billion and $100 billion.                      implementation of Markets in Financial Instruments
                                                                       Directive II (MiFID II) has hit some speed bumps, the drive
As for the Volcker Rule, several changes are still pending.            toward fee transparency will only accelerate. On the other
The proposal intends to modify the scope of applicability              hand, Payment Services Directive II (PSD2) has had the
based on trading size, amend proprietary trading                       intended effect of promoting innovation and competition
provisions, and simplify compliance reporting. It also offers          in payments.
some relief to foreign banking organizations (FBOs).11
                                                                       Additionally, the European Commission (EC) continues
The Community Reinvestment Act (CRA), requiring banks                  to work on completing a single, harmonized regulation
to serve the credit needs of their communities, may also               rulebook and on finalizing the banking union. However,
be revised. The Office of the Comptroller of the Currency              it has faced headwinds in establishing the banking
(OCC) has begun seeking public comment on ways to                      union because the global trading book capital standards
amend this act.12                                                      it seeks to incorporate from the Basel Committee’s
                                                                       Fundamental Review of the Trading Book are in flux.14

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2019 Banking and Capital Markets Outlook: Reimagining transformation

In the United Kingdom, as the March 2019 Brexit                The OCC announced in July 2018 that it would begin
deadline rapidly approaches, much uncertainty remains.         accepting fintech bank charter applications.17 Meanwhile,
Many banks have already established contingency                the United Kingdom’s Financial Conduct Authority (FCA)
plans, possibly preparing for the worst—either a no-           announced plans for a network of global regulators—
deal or hard Brexit. Depending on what ultimately              dubbed the Global Financial Innovation Network (GFIN)—
happens, these plans could be put to the test.                 to establish a global regulatory “sandbox” that can
                                                               foster innovation among technology companies.18
In the APAC region, conduct and culture were high on the
regulation agenda in 2018. China’s banking regulators issued   The Monetary Authority of Singapore is also taking a
extensive guidelines on employee conduct management,           sandbox approach to fintech innovation. And, in Japan,
while Malaysia’s central bank proposed an accountability       the Financial Services Authority is considering a complete
framework for senior officials in financial institutions.      regulatory overhaul in response to the expanding influence
                                                               of fintechs. These changes, if implemented, could have
In 2018, APAC regulators took a closer look at foreign         wide-ranging implications for traditional banks.19
investment and recovery and resolution planning.
India’s central bank, for instance, introduced a new           With such a dynamic regulatory landscape, banks should
framework for the resolution of stressed assets, and           buckle down and make compliance modernization a
Hong Kong updated its recovery planning legislation            priority in 2019, focusing particularly on making regulatory
in accordance with international norms.15                      systems already in place more efficient for business
                                                               strategy. And, of course, throughout all compliance
Meanwhile, in China, the historic step to merge banking        efforts, banks should prioritize soundness and safety.
and insurance watchdogs might help Chinese regulators
better tackle the mounting risk in its financial system.16

Despite growing global regulatory divergence, regulators
in the United States and abroad seem to be encouraging
experimentation by fintechs and welcoming them to the fold.

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2019 Banking and Capital Markets Outlook: Reimagining transformation

     Tax: Strategic recalibration in the new equilibrium
     For the first time in many years, tax issues have come to the forefront
     for many globally

     One of the most notable developments has been the US Tax            the European Commission has proposed a digital tax on giant
     Cuts and Jobs Act, which has already had a meaningful impact        tech corporations that operate in the region in the fight for
     on banks’ financials. Without the lower tax rate, net income for    tax revenues.22 And as regulatory divergence continues, some
     the banking industry in the second quarter of 2018 would have       countries are also taking a deeper look at their own tax policies.
     increased by only $5.6 billion year over year instead of the        Spain, for instance, is considering a new tax on its financial
     $12.1 billion realized.20                                           services sector.23

     Lower tax rates may also reduce the ROI for banks to invest         Tax reforms globally could also pressure countries in the APAC
     in the tax equity market, such as affordable housing projects.      region. Corporate tax rates have declined over the years in
     Banks may need to recalibrate strategies to meet CRA                countries like China, Singapore, and Taiwan but have remained
     requirements if ROI on affordable housing projects can no           elevated in other places like Australia.24 To remain competitive in
     longer be justified. These decisions, no doubt, apply to all        the new landscape, Australia and others might be compelled to
     corporations, but banks tend to have less wiggle room due           reassess their tax rate structures.
     to regulatory capital and liquidity constraints.
                                                                         Navigating the new tax realities will likely be no easy feat,
     Besides the tax cut itself, other important provisions that could   especially for US banks. Banks will need to revisit decades-
     affect banks include a deduction for foreign revenues called the    old decision criteria. More nimble institutions could go
     foreign-derived intangible income (FDII) deduction; the global      beyond direct effects to look at the second- and third-order
     intangible low-tax income (GILTI) provision, which imposes an       implications, whether they relate to human capital or research
     income tax on US taxpayers that generate excess income from         and development.
     foreign operations; and the base erosion and anti-abuse tax
     (BEAT), which disallows tax deductions for payments to              A rigorous analysis of such impacts can happen only with the
     foreign affiliates.21                                               best modeling tools and quality data. Also, current general
                                                                         ledgers may not help track and process data required for many
     Banks are now considering fixes through early 2019 until            of the new provisions in the tax reform law. Companies might
     further guidance on these provisions is released by the Internal    need to build new frameworks that can accommodate emerging
     Revenue Service and the Department of the Treasury. In the          data sources and modeling scenarios.
     long run, the tax changes should prompt banks to strategically
     rethink their business and operating models. Take, for instance,    In many ways, as banks, particularly those with a global
     onshore vs. offshore resource deployment. With lower taxes in       footprint, settle into the new equilibrium, there is a compelling
     the United States, the financial rationale for offshoring may       need for a fresh way of thinking and organizing to make the
     be less compelling—with the new tax regime upending core            most of the latest tax realities.
     operating principles.

     With the US shift in tax policy, governments elsewhere seem
     to have taken notice, and tax reform is now top of mind
     across numerous global jurisdictions. Finance ministers in the
     European Union in countries with historically low tax rates are
     contemplating the potential economic implications in light of
     these recent developments in the United States. In the interim,

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2019 Banking and Capital Markets Outlook: Reimagining transformation

Technology
Creating a symphonic enterprise

In our 2018 outlook, we highlighted the hodgepodge of             Of course, core system modernization is not a new goal
systems, platforms, software, and tools—much of it legacy         for many, so what is different now? As banks accelerate
infrastructure—as a key challenge for bank CIOs. This             their digital transformation efforts, relying on a patchwork
remains relevant for 2019 as well. Banks’ success in digital      of archaic systems can pose significant risk. And, as banks
transformation will ultimately depend on how strategy,            consider adopting technologies like machine learning—
technology, and operations work together across domains.          and eventually blockchain and quantum computing—how
We refer to this as a “symphonic enterprise,”25 where different   well suited are existing systems to run, grow, and secure a
technologies and solutions are seamlessly meshed to create        modern digital bank?
maximum value.
                                                                  The good news is that more banks are taking the leap, but at
To achieve this, excelling at data management, modernizing        their own pace. Some banks have completely replaced their
core infrastructure, embracing AI, and migrating to the public    legacy systems, while others, such as Nordea, are following
cloud should take precedence in 2019 (see figure 4 on the         their lead with multiyear modernization initiatives.26 Others
following page).                                                  have eschewed the “rip and replace” method in favor of
                                                                  microservices and cloud applications, while gradually
But a key step in any of this digital transformation is getting   reducing reliance on the legacy systems.27
a better handle on data to extract the greatest value from
technology investments. No doubt many banks have                  Multiple core banking systems can present an additional
established dedicated data management programs, but               challenge: Which systems should be modernized first, and
success up to this point seems modest at best.                    how? Systems that process high volumes of transactions,
                                                                  like core deposits and credit card platforms, will likely
The data challenge becomes more daunting as data integrity        take significant effort to transform versus some lending
increases in importance. Regulatory expectations will             platforms that might be easier to migrate. Key Bank, for
further elevate the role of effective data management. PSD2       example, chose to modernize its consumer lending platform
mandates that banks make customer data more accessible            to provide a better customer experience.28
to third parties, while GDPR forces banks to ensure the
privacy of their customer data. Not managing the conflicting      In contrast, robotic process automation (RPA) and AI
priorities could raise operational risk for banks.                in banking are advancing rapidly, with RPA bringing
                                                                  productivity gains and AI enabling intelligent insights on
The challenge for many banks is that data, for the most           customers, compliance, and operations.
part, is being managed in siloed, disparate systems, which
complicates banks’ ability to know and serve their clients.

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2019 Banking and Capital Markets Outlook: Reimagining transformation

Figure 4. Plans to use digital technologies
Most important technology area to the organization

          Create digital
                                                                                                  28%
             capability

    Modernize legacy
                                                                                     23%
            systems

   Manage security,
                                                                             18%
identity, and privacy

     Build the modern
                                                                     15%
            workplace

           Adopt cloud
              services                               10%

Plans to use digital technologies in the next 12 months

     Fully deployed                      Trialing                         Planning                    Considering use, but no firm plans                        Not considering

                4%                                             4%                                        5%                                              5%
          12%                                             7%
                           22%                                                                                     18%                           11%                   22%
                                                                                               13%
                                                                            30%
                                                                                                                                                         Artificial
           Platform-driven                                                                             Containers,
                                                            Data lakes                                                                                 intelligence,
             architecture                      26%                                                    microservices,
                                                           and big data                                                                                  bots, and
            through open                                                                              and serverless
    24%                                                     platforms                                                                                    machine
           interfaces/APIs                                                                              computing                          26%
                                                                                            27%                                                          learning
                                                                                                                       37%
                           39%                                                                                                                                     36%
                                                                    33%

Sources: ICT Enterprise Insights 2018/19 – Financial Services & Payments: ICT Drivers and
Technology Priorities of corporate banks, retail banks, payments, and financial market firms, Ovum.

Totals may not add to 100 percent due to rounding.

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2019 Banking and Capital Markets Outlook: Reimagining transformation

We expect some banks and capital markets firms to begin            management with storing and processing, and AI-powered
monetizing their technology expertise as-a-service in              analytics for effective decisions. Increasingly sophisticated
2019, turning cost centers into profit centers. For example,       and diverse offerings from cloud providers seem to be
Nasdaq’s SMARTS Market Surveillance solution, used by              making public cloud migration an attractive option for
exchanges and regulators in 65 markets, analyzes traders’          many, not just for efficiencies but also for agility and scale.
emails and instant messages along with transaction data to         Capital One plans to move its core business and customer
ensure market conduct.29, 30                                       applications to the public cloud by 2021.31 However,
                                                                   concentration risk of migrating systems to a single cloud
We expect cloud will increasingly be viewed to deliver the         provider and concerns about security are factors to keep
following technology priorities: core modernization, data          in mind.

    Talent: With the future of work near,
    learning how to learn could be crucial
                    Banks should take a fresh approach to talent management to prepare for the future of work.
                    Automation, the gig economy, crowdsourcing, and demographic shifts could significantly impact
                    how work is done in the future. Automation goes beyond the elimination of routine tasks and cost
                    cuts. Perhaps more importantly, it is about creating value for customers and meaningful work for
                    employees by focusing on problem solving and creativity.

                    Context-agnostic capabilities, such as skills to design superior customer experience or managing
                    change, could become more important than industry knowledge in banking of the future. In a Deloitte
                    global survey of financial services executives, more than 50 percent reported that the capacity to
                    anticipate change and evolving trends is important.32

                    This means banks should embrace “scalable learning” to remain competitive.33 As machines do
                    manual tasks, “learning how to learn” and learning fast can become competitive advantages. Problem-
                    solving skills requiring intuition, creativity, judgment, persuasion, and empathy could command a
                    premium in a machine-dominated world. The work environment needs to be redesigned to accelerate
                    learning. Cross-functional, project-specific teaming should become more common in the future. Lastly,
                    extending the frontiers of knowledge to others in the ecosystem should be a priority.

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2019 Banking and Capital Markets Outlook: Reimagining transformation

Risk
Strengthening the core with new-age defenses

The risk management function within banks appears to                   To infuse a strategic mind-set into the risk management
be entering a new stage in its evolution, as digitization,             function, banks should reassess the roles and
automation, and externalization gain ground. Banks in                  responsibilities of the first two lines of defense. The first
recent years have made notable advances in how they                    line of defense (the businesses) should be willing to “own”
assess and mitigate risk across the enterprise.                        risk management without too much “oversight” from the
                                                                       second line. Meanwhile, the second line (e.g., the compliance
However, current systems may be less equipped to manage                or risk function) should be a true “enabler” of business and
emerging risks. Algorithms, for instance, enable smarter               be more strategic in its approach. In the United States, the
decisions, but their growing complexity and prevalence                 Federal Reserve Board’s guidance to extend risk ownership
could be problematic.34 Before such applications become                to business leads emphasizes the need for the first line of
the norm, risks from, and to, the algorithms, in addition to           defense to proactively embrace risk management.36
the ethics of AI, should be addressed at the design stage
itself. Also, as more data is used in AI applications, concerns        “Smarter” risk management through the life cycle, especially
over data protection and privacy could escalate institutions’          in the early stages of risk identification and prevention,
risk profile. Increased connectivity with third-party providers        should be another focus area. This generally requires not
and the potential for increased cyber risk is another                  only better technology and analytics to spot risks before
growing concern.                                                       they bubble up but also processes, preventive controls, and
                                                                       people to enable smart risk identification. ANZ has built a
What’s more, traditional risks will likely not subside anytime         proof of concept that combines deep learning techniques
soon. Going forward, personal accountability is expected               with customer data to better assess risk—and do so on a
to be a key focus area in mitigating conduct risk, such as             more dynamic basis than the earlier static models.37
market abuse or leakage of consumers’ confidential data.
And amid rising geopolitical risk, most banks are increasingly
concerned that cyberattacks from sanctioned countries
could be potentially disruptive to the industry.35

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2019 Banking and Capital Markets Outlook: Reimagining transformation

This can be equally applicable to cyber risk. Recent                 While some banks have made good progress, the next
cyberattacks have indicated a need for many banks to                 generation of cyber risk management should consider
understand their ecosystem and the inherent vulnerabilities          a threefold approach: (1) Going back to basics by
that exist within their networks. Some large financial               strengthening controls around vulnerability management
institutions in the United States have set up a new                  to spot and control risks as boundaries expand with cloud
entity, TruSight, primarily to embrace best practices and            and open architecture; (2) applying analytics and AI at scale,
standardize processes to assess risks emerging from the              but recognizing these technologies can also be used by
extended enterprise.38                                               bad actors—think of smart encryption algorithms and self-
                                                                     morphing/intelligent malware that can spiral out of control;
                                                                     and (3) building a resilient infrastructure to withstand
                                                                     systemic disruption and long periods of stress.

    Privacy: In a post-GDPR world,
    what should banks do?
                    Privacy has become a hot button for many reasons. Not only are policy makers introducing new
                    regulations (like GDPR and California’s Consumer Privacy Act of 2018), but also consumers are becoming
                    more sensitive about their privacy. With each instance of data mismanagement in the news, consumers
                    are demanding more transparency in how their data is collected, processed, and shared.

                    In response to GDPR, banks, like other organizations, have updated their privacy policies, but many
                    remain out of compliance with the sweeping regulation.39 Privacy policy updates could only be a short-
                    term fix. Banks can lead the charge by rethinking privacy in a more holistic way, rather than merely
                    meeting compliance requirements.

                    As banks use alternative data (biometric information, for example) and new technologies (like AI), privacy
                    is expected to grow more complex. How do organizations protect consumer data while also providing
                    consumers with services they need? Banks can reengineer the privacy equation and become stewards
                    of customers’ data assets as well.

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2019 Banking and Capital Markets Outlook: Reimagining transformation

Retail banking
The digital leadership race

How is retail banking changing?
The positive economic environment across all regions has               But, across the globe, the retail banking industry is fast
boosted banks’ net interest margin (NIM) and loan growth in            embracing a mobile-centric customer experience, as we
the first half of 2018. The total industry’s NIM, globally, stood      highlighted in our 2018 outlook. Investments in mobile
at 3.59 percent at the end of the first half of 2018, its highest      technologies have increased meaningfully with Asia Pacific
in four years,40 and customer loans grew by 7.84 percent.41            leading the world in the rapid adoption of digital banking
                                                                       due to consumers’ constantly evolving demands.43
In the United States, most banks benefited from rising
interest rates, loan growth, and tax cuts. Meanwhile, in other         Meanwhile, consumers’ experiences in other industries are
parts of the world, better cost controls and growth in loan            upping the ante for most banks. Deloitte’s recent global
demand boosted profitability.                                          digital banking survey across 17 countries showed that
                                                                       banking consumers have a stronger emotional connection
The growing influence of fintechs and nonbanks seems an                to technology brands like Apple, Amazon, and Google
accepted fact now. Investment in online lending platforms              than to their banks. Some of these companies’ ability to
by both startups and incumbents (e.g., Finn by JPMorgan                blend experiences from the physical and digital worlds44 is
Chase) is still significant. While it is unclear how many              considered a good model for banks.
fintechs will apply for the OCC’s new banking charter, this
seems a sign of maturity in the industry as fintechs become            In response, banks are deploying a mix of strategies to stay
part of the mainstream banking system.                                 ahead in the game, including higher technology spending
                                                                       on channel improvement—branches, ATMs, call centers,
In Europe, PSD2 and the open banking standard are having               and digital banking (figure 5). JPMorgan Chase (JPMC) has
the intended effects—spurring innovation and creating                  adopted “mobile first, digital everything,”45 while Santander
a more level playing field. But incumbents have not been               has four investments in the online lending space alone.46
caught flat-footed—they have responded well to the
challenge. Encouragingly, open banking is catching on in
other parts of the world, despite the lack of a regulatory
mandate. And in the United States, banks are expected to
test the waters in 2019.42

13
2019 Banking and Capital Markets Outlook: Reimagining transformation

Figure 5. Retail banks’ information and communications technology (ICT)
spending on channel improvement, 2015–2022 ($B)

50

40                                                                                                              15.2
                                                                                                  14.5
                                                                                13.7
                                                                  13.0
                                                       12.3
                                          11.7
                          11.1
         10.7
30
                                                                                                                10.8
                                                                                                  10.3
                                                                                 9.9
                                                                  9.5
                                                        9.1
                                          8.7
          8.2             8.4
20

                                                                                                  10.1          10.5
                                                                  9.4            9.8
                                          8.6           9.0
          8.1             8.3

10

                                                                  10.4          10.7              11.1          11.4
          9.2             9.3             9.6          10.0

 0
         2015            2016             2017         2018E     2019E         2020E              2021E        2022E

                                 Branch          ATM           Call center      Digital banking

Source: ICT Spending, Ovum.

                                                                                                                                              14
2019 Banking and Capital Markets Outlook: Reimagining transformation

What can we expect in 2019?                                                          institutions could separate from the pack and leap forward.
Price competition in deposits is likely to increase due to                           Such digitization initiatives can boost US banks’ return
higher rates, but a deterioration in credit quality is unlikely                      on total capital employed from the current levels of 12
in 2019. A potential slowdown in 2020 or beyond could,                               percent in 2017 to 18 percent by 2022 and will likely improve
however, alter the competitive dynamics.                                             efficiency ratios by 350 bps over time.48

Banks are expected to become more active in the fintech                              However, the importance of the branch in attracting and
space, either by launching stand-alone digital banks or                              retaining customers, contrary to conventional wisdom,
through partnerships. Online lenders’ growth in student                              should remain. According to a recent Deloitte survey,
loans, home equity, and personal loans can be expected as                            branches will continue to have value, especially with
well. Fintechs now account for about 36 percent of personal                          greater digital enablement (figure 6).49 The need to create
loans originated in the United States by dollar volume.47                            a seamless omnichannel experience to improve customer
                                                                                     experience (CX) has been around for some time. With
Another trend likely to gain momentum is partnerships with                           the available technologies, retail banks are expected to
nonbanks. And as digital transformation spreads across the                           make significant progress in operating in a fluid, post-
value chain—from origination to post-sale servicing—some                             channel world.

Figure 6. Likelihood to increase branch use if the following features are offered

       36%                                   34%                                    31%                             31%
     Extended service                 Digital screen self-service,              Ability to schedule a         Branch that resembles a
   hours through virtual                 with representative                   personal appointment           café where you can plug
  remote services with a                    help if needed                   for a virtual video meeting       in, hang out, and work
      representative                                                            with a representative

Source: Deloitte Center for Financial Services analysis, “Accelerating Digital transformation in banking:
Findings from the global consumer survey on digital banking,” Deloitte Insights, October 9, 2018.

15
2019 Banking and Capital Markets Outlook: Reimagining transformation

M&A: A highly favorable
environment for deal-making
     Globally, the M&A environment in the banking industry is more favorable now than in recent years.
     Technology infrastructure, regulatory divergence, rising rates, and the fight for deposits will likely drive
     a new wave of M&A, particularly “transformative” M&A.

     The dynamics, however, differ by region. In the United States, bank M&A activity, especially “deals of
     want,” are expected to gain further momentum, particularly as midsized banks in the $10 billion to
     $50 billion asset band scale up in response to the increase in the SIFI threshold. We might also see
     community banks merge with growth-oriented credit unions. Consolidation is anticipated especially
     in the regional bank space among those that are digitally challenged.50

     Additionally, the large US banks, constrained domestically, may look for expansion opportunities
     overseas as they look to spend the extra cash from tax relief and favorable domestic business
     conditions. As competition in the fintech space ramps up, some of this cash may be deployed to
     acquire fintech startups as well.

     In Europe, where the pace of financial recovery has lagged, capital-constrained institutions have been
     much slower in restructuring business models than their American counterparts.51 European banks are
     facing an existential threat as larger US banks eat up investment and corporate banking market share.52
     And, considering other factors—overcapacity, persistent profitability challenges, record low interest
     rates, lack of consistent regulation across the European Union, and the rising risk from challenger
     banks53—the rationale for strategic M&A in Europe (“deals of need”) appears compelling. In other words,
     consolidation could be a matter of survival for many banks. However, political factors could weigh heavily
     in discouraging consolidation of the banking industry in Europe, both within and across countries.

     The M&A picture seems different in Asia, where many banks are pursuing growth overseas in an
     increasingly competitive environment.54 Activity has increased particularly in the Southeast region,
     where conditions appear ripe due to marked regional government and regulator support for foreign
     banks. Mitsubishi UFJ Financial Group (MUFG), for instance, has recently been increasing its bank
     alliances in Vietnam, Thailand, Indonesia, and the Philippines.55

                                                                                                                                    16
2019 Banking and Capital Markets Outlook: Reimagining transformation

Corporate banking
Digitization and a new credit discipline

How is corporate banking changing?                                     What can we expect in 2019?
Global corporate lending is on an upward trajectory, with the          Competition for corporate loans is expected to intensify
Americas region leading growth.56 Revenue from corporate               in 2019, along with further easing in credit underwriting
lending grew by 19.5 percent in the Americas from 2015                 standards in the first half of 2019. But given the higher
to 2017. In contrast, corporate lending in the EMEA region             likelihood of a downturn in the next several years, banks
declined by 0.8 percent. With American firms increasing                should adjust their risk appetite accordingly in 2019.
their market share, EMEA corporate lending has stagnated               To alleviate this risk, banks should strengthen their
as the pace of economic recovery remains uneven. The                   specialized lending expertise, which, if executed well,
APAC region, meanwhile, saw corporate lending increase                 can result in a superior ability to screen, value collateral,
by 5.8 percent in revenues. As Asian markets expand, the               structure loans to minimize potential losses, and manage
competitive dynamics and opportunities within APAC’s                   the workout of problem loans. Smaller regional banks,
corporate banking landscape have significantly increased.              especially, could stand to benefit from this focus.

Corporate lending in the United States seems to be                     On the modernization front, corporate banks in 2018
benefiting from currently relaxed credit standards.                    prioritized streamlining front-end operations, as anticipated.
According to the July 2018 Senior Loan Officer Opinion                 Looking ahead, the next big opportunity for innovation will
Survey, US banks’ lending standards on C&I loans have                  likely be in the back office, such as servicing and default
relaxed since 2005.57 Similarly, the OCC in its latest                 management. Also, corporate lending arms at banks could
Semiannual Risk Perspective also highlighted the easing in             learn from fintechs’ use of AI and alternative data for faster
commercial credit underwriting practices. The 24 percent               underwriting decisions.
increase in the number of outstanding matters requiring
attention (MRAs) related to commercial credit underwriting             Corporate banks that modernize their operations could be
from the first quarter of 2017 through the first quarter               better prepared to seize opportunities in the expanding
of 2018 suggests there could already be a problem with                 middle market, where revenue is projected to grow by
relaxed credit standards.58                                            6.7 percent in the next 12 months.60 As banks continue
                                                                       optimizing their cost models, the middle market could
Similarly, terms for leveraged loans have also become more             become a more attractive source for fee income and
borrower friendly, causing the leveraged loan market to                loan growth.
surpass $1 trillion, rivaling the size of the junk bond market.59
                                                                       Finally, corporate banks should consider the role of the
                                                                       “banker,” a position likely to evolve with automation and
                                                                       increased competition from banks and nonbanks alike. The
                                                                       most successful bankers might not be generalists; instead,
                                                                       they will likely specialize in specific industries, solutions, or
                                                                       client segments to add value and insights through unique
                                                                       hard and soft skills that AI cannot yet replicate.

17
2019 Banking and Capital Markets Outlook: Reimagining transformation

Transaction banking
Modernizing operations with a focus
on improving the client experience

How is transaction banking changing?                            in 2019.68 If this were to happen, banks in Asia may
The transaction banking industry continues to be a stable       be best positioned to pick up financing of the redirected
contributor to banks’ topline growth. Meanwhile, revenues       trade volumes.
in custody and asset services in the United States are
expected to increase to $33 billion in 2018, a growth of        In cash management, developments such as SWIFT’s global
5.3 percent from 2017.61 But in trade finance, competition      payments innovation (gpi) standards will likely strengthen
from local players continues to challenge revenues at the       the business case for faster and more transparent
top banks, despite steady trade volumes and a huge trade        cross-border payments. However, with faster payments,
finance gap.62, 63                                              corporate treasurers, for instance, will want their banks to
                                                                provide more dynamic reporting of liquidity positions and
However, despite the seeming stability in many of the           forex exposures in place of today’s end-of-day reporting
transaction banking businesses, some fundamental forces         practices.69 Similarly in prime brokerage, hedge funds
appear at play.                                                 wanting to trade cryptocurrencies could be looking for
                                                                clearing, settlement, and custody solutions from their
First, the nature of client demand seems to be shifting         prime brokers in the OTC market. Citigroup is in the early
rapidly. Clients are increasingly expecting bespoke, value-     stages of building a crypto custody solution for its
added services, such as seamless connectivity and proactive     institutional customers.70
intelligence. Corporate treasurers, for instance, tend to be
seeking more sophisticated risk management solutions to         Catering to customer needs typically requires a
manage credit, operational, and cyber risks.                    multipronged client-centric approach. For example,
                                                                Deutsche Bank brought together its clients and product
Technology infrastructure should also be modernized.            developers in its North Carolina office to better understand
Using reconciliation as an example, many banks are still        clients’ pain points and technology solution requirements.71
performing manual, inefficient processes despite previous       Acknowledging the limitations of its legacy system, the bank
attempts to automate. To address this problem, BNP Paribas      collaborated with fintechs to address clients’ needs.72 The
successfully completed a pilot for an end-to-end fund           bank is also a participant in the SWIFT gpi initiative, where
distribution transaction on blockchain64 and automated          it plans to use cloud and open APIs for real-time payments
security transfers in the custody business.65                   and reporting.73

While many transaction banking businesses enjoy high            As noted in a last year’s report, automating existing
barriers to entry, this has not prevented fintechs from         processes is not enough. Instead, banks should empower
entering these businesses—consider London-based fintech         clients to serve themselves when and how they desire.74
firm Kantox growing in the foreign exchange market.66           This message might bear repeating as banks ramp up
                                                                modernization.
Lastly, geopolitical concerns, such as Brexit, trade wars,
and global divergence in regulatory expectations, seem to       As with other banking products, incumbents are expected
remain top of mind for transaction banking executives.67        to expand the use of blockchain, RPA, and AI technologies
                                                                and better data management in both the front and back
What can we expect in 2019?                                     offices in transaction banking. In July, State Street launched
Although current protectionist policies and geopolitical        AI-based news feeds to help clients in its asset servicing
frictions may not materially hurt global trade volumes, they    business with their investment decisions.75
could open new trade corridors within the Asia Pacific region

                                                                                                                                           18
2019 Banking and Capital Markets Outlook: Reimagining transformation

Investment banking
New client engagement models and
ecosystem orchestration

How is investment banking changing?                                    command price premiums. But the post-crisis economics
The global investment banking industry has yet to find                 and the rapid spread of digitization seem to have altered the
its footing after the financial crisis. However, the industry          competitive dynamics significantly—with many of the earlier
seems to be inching back to normalcy, in terms of capital              differentiators becoming less potent.83
adequacy and profitability. For the first time since 2012,
revenues in both trading and advisory businesses will have             The economic realities across the trading life cycle continue
increased in 2018.76                                                   to put pressure on many institutions. While much has
                                                                       been done already in rationalizing business models and
Business is good on several fronts: Global M&A activity                ramping up efficiencies, the vestiges of old operating models
reached $2.1 trillion in the first half of 2018, a 36 percent          are still visible, even at the most mature institutions.84, 85
year-over-year increase. Cross-border M&A deals also                   Unfortunately, the journey is not complete. There is still
set a record.77                                                        room to simplify the core.

The recovery in fortunes, however, has not been uniform—               What can we expect in 2019?
the global dominance of US banks continues. For instance,              2019 could turn out be a pivotal year in investment
the top spots for M&A and equity and fixed-income                      banks’ transition to become simpler and leaner, yet
underwriting were held by US banks. In fact, among the                 stronger, franchises. Meaningful changes are expected
top global investment banks, US banks’ market share has                on many fronts.
increased from 49 percent in 2010 to 58 percent in 2017.78
                                                                       First, trading arms should get their FICC cost base under
But geopolitical uncertainty from trade wars, the US                   control (figure 7); although some progress has been made
midterm elections, and Brexit could weigh on the investment            in rationalizing expenses, the job is not complete. For
banking industry, even as the regulatory climate seems                 instance, in 2017, staff costs dropped sharply, partly as a
less ominous. In Europe, MiFID II’s impact appears to be               result of continued cost-reduction efforts, but these savings
marginal.79, 80 And, globally, investment banks are preparing          have been offset by new technology investments. This trend
for LIBOR’s replacement in 2021 (see sidebar on page 21).              is expected to continue for some time.

Meanwhile, most investment banks are going full throttle               But more strategically, a fundamental rethinking of the client
on a variety of digital transformation efforts to contain              engagement model should be considered: a pivot from
costs and improve customer experience. However, many                   product orientation to a client-centric, bespoke delivery
operational inefficiencies still remain, and the business              of services, and orchestrating solutions from others in the
models at most banks generally remain the same.81                      ecosystem. This new engagement model would empower
                                                                       clients through seamless connectivity, self-discovery, and
Overall, a subtle yet fundamental change appears under                 “intelligent” delivery of insights.
way in investment banking. The balance of power seems
to be shifting to the buy side, especially to the large                The simplification path will entail a sharper focus on who
institutions.82 Commoditization, price competition, and                to serve, what to offer, and how—essentially the clients-
growth in market clout have bolstered clients’ negotiating             products-solutions matrix. To execute on this new vision,
power. Until recently, investment banks could count on                 investment banks should think more broadly about using
their balance sheets, product breadth, global scale, market-           third parties and utilities for noncore activities. This would
making prowess, and reputation to attract clients and                  require greater agility.

19
2019 Banking and Capital Markets Outlook: Reimagining transformation

Figure 7. Performance of FICC businesses ($B)

90                                                                                                               25

80

                                                                                                                 20
70

60
                                                                                                                 15
50

40
                                                                                                                 10
30

20
                                                                                                                 5

10

 0                                                                                                               0
              FY15                     FY16            FY17                    FY18E              FY19E

                Revenues (left axis)          Operating expenses (left axis)            Profits (right axis)

Source: Tricumen forecasts of aggregate performance of 13 major US and European investment banks.

Banks have been at the forefront of digitization for a while                       Sell-side firms can use AI and machine learning for more
now and continue to spend billions of dollars in modernizing                       sophisticated uses beyond efficiency improvement.
their technology infrastructure.86 This trend is picking up                        Embedding increasingly intelligent systems into trading
even in areas that have been averse to automation in the                           algorithms, pricing engines, and risk management systems
past, like fixed-income trading. Examples include Goldman’s                        should be a key focus area, particularly in FICC and
bond-pricing engine that can handle transactions of up to                          derivatives trading.90 And, as with other areas within banking
$2 million without a human touch;87 Credit Suisse’s Clive,                         and capital markets, public cloud adoption could boost
which automates small trades;88 and AllianceBernstein’s                            digitization efforts across the board, particularly for
latest Abbie algorithm, which handles about 35 percent                             noncore processes.91
of its bond trades.89

                                                                                                                                                               20
2019 Banking and Capital Markets Outlook: Reimagining transformation

Becoming a true client-centric operation cannot happen                  So, what is the future state of investment banking?
without excelling at using multiple sources of data and                 While the exact state might differ by institution, one
applying rigorous analytics to generate client insights across          thing that seems quite certain is that in five or 10 years,
the life cycle. Competitive advantage will accrue not merely            the investment bank of the future will likely be simpler,
from having the most advanced trade execution technology                leaner, and more agile: simple in the sense that it will
but also predictive analytics to help solve clients’ problems.          simplify business processes across the value chain and
                                                                        chop off any layers of complexity that do not directly
                                                                        support the core mission of being client-centric.

     LIBOR: The likely path ahead
     in the LIBOR transition
     LIBOR—one of the world’s most-referenced financial benchmarks—
     might cease to exist in 2021. As a result, financial institutions and
     regulators have been working feverishly to design replacements.
                      The desire for transaction-based LIBOR alternatives is a global phenomenon. In the United States,
                      the New York Federal Reserve began to publish the Secured Overnight Funding Rate (SOFR), as an
                      alternative to USD LIBOR, in April 2018. In other regions, replacements include the Sterling Overnight
                      Index Average (SONIA) in the United Kingdom, the Swiss Average Rate Overnight (SARON) in Switzerland,
                      the Tokyo Overnight Average Rate (TONAR) in Japan, and the Euro OverNight Index Average (EONIA) in
                      the European Union.

                      Dealing with multiple reference rates—for different markets/currencies that are not uniform in that
                      they may be secured or unsecured, with differing underlying references, and in varying stages of
                      implementation—will likely increase complexity for financial institutions operating globally.

                      Of course, before the alternative reference rates are adopted, a robust term-rates market needs to exist
                      for most financial transactions. And, although documentation citing these alternative rates is beginning
                      to take hold for new financial contracts, revising the language for legacy transactions could be one of the
                      thorniest challenges.

                      As such, the transition to alternative reference rates globally seems fraught with risk and uncertainty.
                      Financial institutions will need to contend with many operational, accounting, technical, governance, and
                      other issues. We expect banks and their clients to accelerate their efforts to gear up for the transition in
                      2019. They should assess the impact LIBOR has on their businesses and design a transition plan.
                      A successful transition will likely require involvement from a wide range of stakeholders.

21
2019 Banking and Capital Markets Outlook: Reimagining transformation

Payments
The imperative to diversify growth, bolster security,
and restructure the organization

How is payments changing?                                                            Meanwhile, payment modernization efforts in the form
Payments continues to be one of the most disruptive                                  of new rails to process faster/real-time payments (RTP)
and dynamic banking businesses. Innovations spanning                                 continue to gather steam in many countries, including
the spectrum from incumbents to fintechs alike are                                   Australia, Canada, and the United States. Also, regulations
reshaping the payments landscape, boosting customer                                  encouraging competition and innovation, like PSD2, are
expectations, and intensifying competition globally.                                 fostering new account-to-account payments solutions96
                                                                                     and challenging existing payment rails.
With friction endemic in almost every legacy payment
system, the search for frictionless digital payment                                  Payments is also attracting more capital and M&A
experiences continues. PayPal, for instance, crossed                                 globally (figure 8). Adyen’s $1 billion initial public offering
250 million active users worldwide.92 Apple Pay and                                  in Europe97 and PayPal’s acquisition of iZettle to expand
Amazon Go93 are bringing in new users rapidly. Similarly,                            its in-store payments98 are two such examples.
in China, Tencent and Alipay are setting new records for
digital payment transactions.94 In fact, contactless in-store
payments are expected to total $2 trillion globally by 2020.95

Figure 8. Payments is a hotbed of investments and M&A

                                 1H 2018                           FY 2017

                            $15.3B                             $2.7B
  Venture capital                55 deals                         131 deals
     funding

                            $43.2B                           $31.2B
    Payments                     67 deals                         73 deals
 processing M&A

Sources: Venture Scanner data, Deloitte Center for Financial Services analysis for
venture capital funding. Dealogic data for payments processing M&A.

                                                                                                                                                                 22
2019 Banking and Capital Markets Outlook: Reimagining transformation

These disruptive innovations are forcing incumbents                    in business payments, demand for low-cost RTP solutions
to respond to a fundamental business reality:                          is likely to be stronger, given current inefficiencies and the
how to maintain revenue growth and profitability                       size of the float volume. Therefore, US payment providers,
and withstand product commoditization.                                 both large and small, should refine their value proposition
                                                                       and go-to-market strategy in RTP solutions in 2019.
What can we expect in 2019?
Driving volume-based fee growth in payments is expected                Faster payments could also amplify the need to balance
to become increasingly challenging for card issuers in                 convenience and speed with security. Account takeover
2019. Cheaper digital solutions from nontraditional                    fraud (prevalent in digital payments) has replaced
players and expensive reward programs may make                         counterfeit card fraud (common in physical payments) as
it difficult for card issuers to increase fee income.99                the top fraud type.102 Also, more merchants could begin
However, focusing on growing the card portfolio for                    accepting new payment forms, including cryptocurrencies
its predictable interest income is still paramount.                    and tokens, in which incumbents currently have limited
                                                                       risk management experience. Behavioral biometrics and
Furthermore, incumbents are expected to differentiate                  AI should be used alongside physical biometrics to step
customer experience in areas fraught with friction—                    up dynamic authentication. Royal Bank of Scotland began
cross-border payments and B2B payments being prime                     collecting behavioral biometrics data for its wealthy clients
examples. For example, Visa recently acquired Fraedom,                 two years ago and has now expanded the scope to include
a software-as-a-service solution,100 to expand                         all retail and commercial customers.103
in the growing B2B payments space.
                                                                       Unlocking the full value of data in designing new services
Ancillary services should be another focus area.                       or strengthening security may be difficult unless there
Data-driven insights to help merchants and consumers                   is a concerted effort to bring together disparate data
in their decisions should be valued, such as Mastercard’s              across different business lines and systems, however.
tool to analyze retailers’ purchase data to determine                  Therefore, incumbents should consider restructuring
new store locations.101                                                their organizations around customer solutions rather
                                                                       than products. This could improve organizational
Growth of faster payments is likely to be sluggish in the              agility and enhance customer experience.
United States due to the absence of a regulatory mandate
and a burning consumer need in the retail market. However,

23
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